Which of the Following Are Allowable Methods of Dealing with a Discount

question 10

Multiple Choice

Which of the following are allowable methods of dealing with a discount on issue of debentures?
1) Amortise the discount by straight line over the life of the debenture as an annual period expense to profit and loss
2) Amortise the discount by reducing balance over the life of the debenture as an annual period expense to profit and loss
3) Recognise the whole discount immediately as a period expense
4) Amortise the discount by adjusting (increasing) interest expense over the life of the debenture

• A)1, 2 and 3
• B)1, 2 and 4
• C)1, 2, 3 and 4
• D)4 only

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Definitions:

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy a specified amount of an underlying asset at a predetermined price within a set timeframe.

Swap Contract

A financial agreement between two parties to exchange sequences of cash flows for a set period according to specified terms.

Option Contract

A contract that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific time period.

Option Contract

A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.